Individual coverage HRAs (ICHRA) and Medicare

The individual coverage health reimbursement arrangement (ICHRA) is a great option for employers seeking to provide affordable health benefits to their employees. It gives employees the freedom to choose the insurance plans that fit their specific needs.

But the ICHRA isn’t only for employees with marketplace coverage. It also works alongside Medicare. However, for many Medicare-eligible employees, the relationship between ICHRA and Medicare can seem complex, often leading to confusion and misconceptions.

In this article, we'll explain how ICHRA and Medicare interact.

In this blog post, you'll learn:

• How Medicare beneficiaries can benefit from an ICHRA.
• Which Medicare Parts an ICHRA can reimburse.
• How PeopleKeep by Remodel Health can help you offer a compliant ICHRA to your team.

What is ICHRA?

The ICHRA is an employer-sponsored health benefit. It provides employers with a flexible approach to healthcare coverage. It allows them to reimburse employees for individual health insurance coverage instead of offering them a traditional group health insurance plan.

Under this arrangement, employers offer a specific amount of money tax-free to their eligible employees. Employees purchase individual health insurance plans that best suit their needs and request reimbursement for those premiums. In addition to using their allowance for individual health insurance premiums, employers can also reimburse employees for more than 200 other types of out-of-pocket medical expenses.

Some examples of eligible expenses include:

• Monthly premiums for health, vision, and dental plans
• Preventive services
• Emergency care
• Prescription drugs
• Over-the-counter medication

There are no annual limits on contribution amounts with an ICHRA, so employers can offer their employees as much as they'd like in allowances. They can also vary allowances using 11 employee classes, employee age, or family size. An employee needs their own individual health insurance policy to participate in the ICHRA.

What is Medicare?

Medicare is a federal health insurance program for individuals 65 and older. It also covers some younger people with disabilities. According to the Centers for Medicare and Medicaid Services (CMS), nearly 70 million individuals have Medicare coverage^1.

There are four types available:

• Medicare Part A. Part A is hospital insurance.
• Medicare Part B. Part B is medical insurance.
• Medicare Part C. Part C, also called Medicare Advantage, is an alternative to Original Medicare (Parts A and B).
• Medicare Part D. Part D provides prescription drug coverage

Medicare helps to reduce medical costs for eligible individuals, covering various healthcare services and treatments to ensure access to essential care.

How do ICHRA and Medicare interact?

It's common for employees of small businesses to opt for Medicare over their employer's group health insurance plan because the benefits are often better. Even so, Medicare recipients also tend to have more healthcare expenses. Employers might also want to offer an ICHRA to their entire workforce, including those with Medicare.

For this reason, many employers wonder if the ICHRA might be a way to help these employees with their out-of-pocket expenses.

Scenario 1: You only offer the ICHRA and no group health plan

If you plan to offer the ICHRA to all of your employees, those with Medicare can participate in the benefit. Employees must have individual health insurance coverage to take part in the ICHRA. As long as employees have Medicare Parts A and B, or Medicare Part C, this counts as qualifying individual health insurance.

You can then reimburse these employees for their Medicare premiums and out-of-pocket costs.

If you currently offer a group plan, some of your employees with coverage through Medicare and your group plan may only have Part A coverage. Canceling your group coverage and offering an ICHRA can create a special enrollment period (SEP) for Medicare. This allows them to also enroll in Part B coverage so that they can participate in the ICHRA.

If you currently offer a group plan, it’s possible that your Medicare-eligible employees haven’t enrolled in Medicare yet. Since they’ll be ineligible for individual health coverage, they’ll need to enroll in Medicare to participate in the ICHRA.

Scenario 2: Offering an ICHRA and a group health plan to different employees

If you're looking to only offer Medicare-eligible employees an ICHRA, there are a few rules to consider that may make that challenging. Employees can't have an ICHRA if you also offer them a group health insurance plan. You also can't offer employees a choice between the ICHRA and a group plan. The federal government established these guidelines in 54.9802-4(c)(2) of the final rule for Health Reimbursement Arrangements and Other Account-Based Group Health Plans².

If you want to offer a group plan and an ICHRA, you can use employee classes to offer some classes a group plan and others an ICHRA. However, there is no Medicare employee class. Instead, you’d need to use one or more of the 11 permitted ICHRA employee classes.

This means that if an employer can place all of their Medicare-eligible employees into the same class, they can offer that class an ICHRA, as long as they don't offer any employees in this class a group health insurance plan.

The classes of employees include:

• Full-time employees
• Part-time employees
• Seasonal employees
• Temporary employees
• Salaried employees
• Hourly workers
• Employees in a waiting period
• Foreign employees who work abroad
• Employees in different locations
• A combination of two or more of these classes

These classes must be “bona fide.” You can't exclude employees who fit the class definitions from a class.

Which Medicare parts can ICHRA reimburse?

To be eligible for an ICHRA, an employee who qualifies for Medicare must have coverage under both Parts A and B, or opt for Part C. Having only Part B does not meet the criteria for minimum essential coverage (MEC).

Employers can use ICHRAs to reimburse costs for Medicare health plan premiums and Medigap (supplemental) policies, in addition to various medical care expenses. This includes reimbursements for premiums associated with Medicare Parts A, B, C, D, and Medigap plans.

How does Medicare work with QSEHRA?

While the ICHRA works for small, midsize, and large employers, the qualified small employer HRA (QESHRA) is only for organizations with fewer than 50 full-time equivalent employees (FTEs) that don't offer a group plan. Like the ICHRA, Medicare beneficiaries can use their QSEHRA allowance to cover eligible medical costs, including individual health insurance premiums.

Read our article to learn which Medicare plans work with the QSEHRA and under what conditions.

PeopleKeep by Remodel Health makes offering ICHRA easier

If you want to offer hassle-free health benefits, PeopleKeep by Remodel Health can help! With our ICHRA administration platform, you can provide personalized health benefits to your diverse team in just minutes each month.

We ease the administrative burden of offering an ICHRA by:

• Customizing your ICHRA to the specific needs of your workforce.
• Reviewing employees' reimbursement requests for eligible healthcare expenses.
• Creating your legal plan documents.
• Sending automatic notices to employees on your behalf.
• Providing award-winning customer support.

Additionally, your non-Medicare employees can shop for individual health plans and ancillary benefits directly from their PeopleKeep dashboard. They can compare health policies based on network type, metal tier, or carrier. We also offer health insurance advisements to help employees with challenging medical situations navigate their options.

If you’re an enterprise organization looking to offer an ICHRA, Remodel Health’s ICHRA+ platform with hands-on support is a better fit. You’ll have access to additional compliance tools, dedicated account managers, and the most complete ICHRA service model in the industry.

Conclusion

ICHRAs are health benefits that offer flexibility and cost control, unlike traditional group health insurance. Employees with Medicare can participate in the ICHRA. Employers can easily reimburse them for Medicare premiums and other out-of-pocket medical costs.

Ready to offer an ICHRA at your organization? Schedule a call with one of our HRA specialists today to get started!

This blog article was originally published on July 16, 2020. It was last updated on April 21, 2026.

References

1. Medicare Monthly Enrollments - CMS
2. ICHRA Final Rules